Reference no: EM131075316

Question:

Part - Macroeconomics

Question 1.

(a) Describe what is meant by the marginal propensity to consume (mpc) and give its formula.

(b) Assume that GDP rises from $550bn to $650bn. Assume that this results in the consumption of goods and services rising from $340bn to $400bn. What is the mpc?

(a) Assuming that the domestic mpc remains constant, what will the level of consumption be if GDP rises to $700bn?

(b) If Australian consumption of goods and services is $400bn, investment is $120bn, government expenditure is $150bn, exports of goods and services are $140bn and imports of goods and services are $145bn, what is the level of aggregate expenditure (E)?

(c) Given your answer to (d), and assuming that GDP is currently $650bn, what will happen to GDP?
Rise / Fall / Stay the same

Question 2:

(a) Describe the relevant criteria that the Australian Bureau of Statistics use to determine whether a person is ‘unemployed' and what problems do you see using this measure?

(b) Why is frictional unemployment inevitable in an economy?

(c) Is structural unemployment something macroeconomic policymakers should be concerned about? How does it differ from cyclical unemployment?

Question 3:

(a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram, and 2.5 marks for the explanation)

(b) Provide (describe) two (2) causes of each type of inflation

Question 4:

(a) Explain the difference between the Keynesian and monetarist views on how an increase in the money supply causes inflation.

(b) Why is the shape of the aggregate supply curve important to the Keynesian-monetarist controversy?

Question 5:

Using the aggregate demand - aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event)

(a) A significant destruction in an economy's capital stock because of an earthquake;

(b) An increase in personal income tax;

(c) An increase in exports;

(d) An improvement in the marketing and selling skills of firm managers;

Question 6:

(a) Consider this statement: ‘Banks do not create money because this is the Central Bank's (Reserve Bank of Australia) responsibility'. Do you agree or disagree? Explain.

(b) Suppose that you deposit your pay cheque drawn on another bank into your own bank account. Explain the impact on the overall money supply that this will have in the economy.

(c) Suppoes that you remove $1000 from under your mattress and deposit it in the Westpack bank. If the required reserve ratio is 10 per cent, what is the maximum amount the bank can lend from this deposit?

Question 7:

(a) If the Central Bank (Reserve Bank of Australia) bought $100 million of government securities from private sector money markets, other things being equal, what would be the effect on the following?

(i) The economy's monetary base;

(ii) Short-term money market interest rates;

(iii) Longer maturity interest rates;

(iv) Aggregate demand, economic activity and inflation.

Question 8:

Which of the following would cause a growth in the money supply? Answer yes, no, or possibly. If your answer is ‘possibly' then explain the circumstances under which the answer would be ‘yes'.

(a) The selling of government securities to banks;

(b) A fall in interest rates;

(c) An increase in government expenditure, financed by borrowing from the banking sector;

(d) The purchase of government securities by the Central Bank from the banking sector;

(e) It is agreed by the Treasurer and the Governor of the Central Bank to
reduce the target rate of inflation.

Question 9:

The following are the various elements within a nation's balance of payments account:
(i) Imports of goods (-)
(ii) Exports of goods (+)
(iii) Imports of services (-)
(iv) Exports of services (+)
(v) Other income outflows (-)
(vi) Other income inflows (+)
(vii) Capital transfers sent overseas from the nation (-)
(viii) Capital transfers to the nation from overseas (+)
(ix) The nation's investments overseas (-)
(x) Investment in the nation from overseas (+)
(xi) Short-term financial outflows (-)
(xii) Short-term financial inflows (+)
(xiii) Adding to reserves (-)
(xiv) Drawing on reserves (+)

Into which of the above categories would you put the following? (total 10 marks - 1 mark each)

(a) DVD recorders imported into the nation from Japan;

(b) Insurance cover purchased in the nation by overseas residents;

(c) The nation gives overseas aid to a developing country;

(d) US car company sets up a factory in the nation;

(e) Some of the nation's residents take a holiday in Bali;

(f) Interest earned by the nation's residents on overseas assets;

(g) Running down the stock of foreign exchange in the Central Bank of the nation;

(h) Migrants to the nation transferring property to the nation;

(i) New deposits made in banks in the nation by overseas residents;

(j) The nation's palm oil is sold in the United Kingdom.

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